Weak consensus sentiment may be the time to buy.
Warren Buffett has provided many pearls of wisdom and one of our favourites is the reminder to “be fearful when others are greedy and greedy when others are fearful”. It is a contrarian viewpoint and just makes good sense. So often we see investors caught up in the hype and buying high (along with the crowd) and selling low (out of a fear of further price declines).
Markets move through classic cycles from trough (maximum pessimism) to peak (maximum euphoria) and it takes a recognition of this and discipline to do the opposite of the crowd. When viable industries are simply out of favor, this is fertile ground to begin our research.
From the perspective of companies, it is not uncommon for them to cut costs and turn their attention to balance sheets when times are tough. This increased focus on the things that are necessary to allow them to survive a downturn ultimately puts them in a stronger position when things turn. Which brings us back to “buy low and sell high”.
Just about everything is cyclical… stocks aren’t usually cheap and popular at the same time…We often begin our search for opportunities in companies and industries we understand that are having problems. The stocks of such companies are more likely to be mispriced. We attempt to discern the source of consensus pessimism in such situations, and occasionally take the other side of the trade…
The Stranger Things happening to yield…Incremental capital is usually attracted to what has been working best recently, but especially late in the cycle. A memorable investment adage warns, what the wise man does in the beginning, the fool does in the end.
We’re marking the holidays with the 12 Days of Investing the Pender Way. Short posts in which we share some of the key tenets of our investment process.